Can border taxes end carbon leakage and help reduce greenhouse emissions?

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The issue of climate change poses an immense existential threat. Could the various proposed carbon border taxes help reduce greenhouse emissions and encourage emitters to play their part? In this Hinrich Foundation sponsored NPF webinar, three speakers discussed the background of the Europe-advocated CBAM, its global impact, and the things for journalists to look out for when covering the subject . Here are five key takeaways:

1. The European Commission’s proposed “carbon border adjustment mechanism” – a CBAM, better known as a carbon border tax – is an attempt to stem carbon leakage. The theory is simple: If a product is made in an environmentally lax nation, the excess carbon emissions produced compared with the same product made under tighter emissions standards should be taxed. Otherwise, production will shift (or leak) from the developed world to nations that are doing little to reduce their carbon footprint, and the world won’t meet its carbon reduction targets. The CBAM is part of the 2019 European Green Deal, a massive package of environmental initiatives, said Cándido García Molyneux, an attorney in the Brussels law office of Covington and Burling. The European Green Deal includes a package known as “Fit for 55,” which requires a 55% reduction of emissions by 2030, García Molyneux added. “This is an enormous ambition, but at the same time it’s a legally binding requirement,” he said. While Democrats in the US have also proposed a carbon border tax, the European proposal is far more advanced – and more likely to be implemented.
2. The EU proposal first targets sectors that are prone to manufacturing offshoring. Currently, the European CBAM would cover goods at high risk of carbon leakages such as steel, iron, aluminum, cement, electricity and certain fertilizers. The European Commission also hopes to motivate other countries to implement similar climate measures, said García Molyneux. “The proposed CBAM in the EU is also, of course, intended to influence the international discussions on climate change that are going on,” García Molyneux said.
3. The accounting can get tricky. One issue facing the EU proposal is determining how embedded emissions – meaning the sum of greenhouse gas emissions resulting from the production process – are calculated. García Molyneux said that several factors can affect the calculation, such as whether a good is complex or if it results in direct or indirect emissions.
4. Carbon border taxes may hurt developing nations. Harun Onder, a senior economist with the World Bank, said carbon border taxes are expected to reduce the economic output of developing countries – and so leaders of developed nations need to consider the fairness of harming their developing brethren to fix a problem created by richer nations. The effect of a CBAM on greenhouse gas emissions, however, is less certain and will depend on the country and its policies, such as whether it imposes a domestic price on carbon.
5. The implementation of a first-of-its-kind CBAM is newsworthy but complicated. It’s a policy with potentially “endless ramifications” in areas like economics and legal retaliation, said Paola Tamma, a reporter for Politico Europe. Tamma added that reporters covering a CBAM, whether in Europe or the US, should understand the context and motivations for the policy, which include boosting domestic industrial competitiveness. She said the adoption process in Europe is likely to be lengthy and may extend into next year. One nation to watch is Germany, as they “have been very skeptical of any unilateral policies, which could result in trade retaliation or make their export less competitive,” Tamma said.

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Telling the global trade story

This briefing is part of a series of National Press Foundation's online webinars covering all aspects of global trade. Click here to view all.

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